Educational Articles

Coverage Initiation: WPX Energy

Paul E. Debbas, CFA
| March 04, 2013

Value Line has initiated coverage of WPX Energy (WPX) in its flagship product, The Value Line Investment Survey. WPX is the 10th-largest natural gas producer in the United States, and also produces natural gas liquids (NGLs) and oil. The company estimated that its 2012 production was 80% natural gas, 12% NGLs, and 8% oil. Its main basins of production are the Piceance (in fact, it is the largest natural gas producer in Colorado), Bakken (North Dakota), and Marcellus (Pennsylvania). These are considered “unconventional” sources of gas because they come from shale formations. It also has interests in New Mexico, Wyoming, Argentina, and Colombia. WPX is headquartered in Tulsa, Oklahoma, has 4.6 trillion cubic feet equivalent of proven reserves, and employs more than 1,200 people.

WPX entered the exploration and production (E&P) business in 1983 as part of The Williams Companies (WMB). It purchased Barrett Resources for $2.8 billion in 2001 and expanded internationally the following year. In 2005, the company started developing high-efficiency drilling rigs. WPX was spun off from Williams at the end of 2011 and began trading on the New York Stock Exchange on January 3, 2012. Each Williams stockholder received one share of WPX for every three Williams shares.

The big issue facing WPX today is low natural gas prices. This caused the bottom line to be in the red in the first three quarters of 2012 (even if an impairment charge is excluded). Accordingly, the recent share price is well below the high of $19.76 that was reached in March of 2012. It should be noted that cash flow from operations was positive over that time frame.

What can management do in a period of low gas prices? Like many producers, WPX hedges a portion of its expected production. This sacrifices some upside potential, but reduces downside risk. Expense control becomes even more important when prices are low. The company’s finding costs are among the lowest in the industry. And, given the high level of oil prices, WPX is increasing its oil production. That’s why it acquired 85,000 acres in Bakken in 2010. WPX spent more than $1.5 billion in 2012, and much of its capital expenditures were directed towards oil and NGLs. The company projects that its domestic oil production will surge at a compounded annual growth rate of 25%-30% through 2015.

Low natural gas prices are negative for producers, but they increase the demand for their product. Consequently, many electric utilities have replaced some of their coal-fired power generation with output from gas-fired units. The recovering economy also points to higher demand for natural gas from industrial users. This increased demand for natural gas might well lead to higher prices, although few people or companies are expecting a return to the lofty levels of 2008 any time soon.

WPX stock is best suited for those seeking an investment in natural gas E&P, with the added benefits of some exposure to oil and NGLs. While the company’s balance sheet is in decent shape (as of the end of fiscal 2012), with long-term debt making up 22% of total capitalization, income-oriented investors should look elsewhere, as WPX pays no dividend. Moreover, in its brief history, the issue has been quite volatile.

For a more thorough look at WPX’s business prospects, and the particular investment merits of its stock, subscribers should examine our full report in The Value Line Investment Survey.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.